Business partnerships are like marriage – some work and some don’t. And when they don’t, that is when the problems set in.
In any business where the owners no longer get on well, there are going to be issues to deal with.
Apart from the differences between the owners, the business is likely to be dislocated because the focus of the owners will be diverted from the business to how they can best separate from each other.
And the longer the differences continue without resolution, the greater the dislocation for the business. Add to this the cost of lawyers and other advisers and it is not a pretty picture.
Going into business with equal equity or shareholdings seems like the right thing to do. You are equal business partners.
Great if you both agree on things, but if there is disagreement the business is effectively dead locked.
This situation can present itself both in shareholder disputes or even in a family company where there has been a marriage breakdown and the parties are not signing or agreeing to anything while the property settlement is being sorted out.
Things as simple as the rollover or extension of business borrowings with the bank can be frozen because neither party has a majority control or the right to contract the company.
You can overcome this problem by ensuring that one of the business owners does have effective control or even where there is equal control a simple shareholder agreement can be put in place, a series of ‘rules’ agreed by the parties.
Normally these rules cover a range of issues necessary to the continued operation of the business.
They agree the process for things like:
- Remuneration of the owners
- Dividend payments
- Major decisions on things like buying another business or the sale of your business
- Borrowing by the company
- Management and decision-making
- Raising more capital or the introduction of new partners
- How shares can be sold by individual partners
- What happens in the event of death or disability of an owner
- How the business and interests in the business will be valued
And good shareholder agreements will provide a dispute resolution mechanism. Typically this will move the owners from a common sense ‘let’s sit down and talk this through’ approach to an enforceable position where one or other of the owners will buy the other one out.
This is sometimes referred to as a shotgun clause which allows either party to offer a price to buy out the other.
The tag is that the offer must either be accepted or alternately to buy out the party making the offer for the same price.
Sudden death, but it resolves the problem and ensures a fair price for both parties.
The time to put a shareholder agreement in place is when there are no disputes or issues. Statistics say that a reasonable number of businesses will face a dispute position during its lifetime.
Have a mechanism to overcome this and you will save a lot of headaches and cost.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.